Allan Fels: Courts should have the power to break up big businesses that behave badly

Australian authorities have never had the power to break up big businesses that behave badly.

It’s a power available to courts in the United States and elsewhere, but not here – at least not unless the Greens succeed with a bill now before the Senate.

The so-called Competition and Consumer Amendment (Divestiture Powers) Bill would enable courts to break up firms that misuse their substantial market power under section 46 of the Competition and Consumer Act.

The Coalition is reported to be examining the same sort of thing, with the breakup powers limited to supermarket chains that abuse their market power.

Section 46 prohibits firms with a substantial degree of power in a market from engaging in conduct that has the purpose, effect, or likely effect of substantially lessening competition in that market.

The new power proposed by the Greens would enable courts to direct corporations that contravene Section 46 to sell assets or do whatever else was necessary to reduce their power within a period of two years.

I recommended such a power earlier this year in my report to the Australian Council of Trade Unions on price gouging and unfair pricing practices.

Australia’s approach to such powers has always been unbalanced.

With one exception, our courts can’t break up corporations

It has long been recognised (and acknowledged in most economics textbooks) that competition doesn’t work well in markets where only one or a few big firms dominate.

Concentrated markets can lead to overpricing, the squeezing of suppliers and outcomes very different from markets with higher competition.

But rather than take action against the cause of many of these problems – market concentration – Australia’s approach has been to merely take action against the problems it creates. With one exception.

That exception is mergers. In cases where firms merge without obtaining the prior approval of the Australian Competition and Consumer Commission (ACCC) and the commission finds the merger contravened the Competition and Consumer Act, it can apply to the courts (within three years) to have the merger undone.

While this power is useful – and effective in getting firms to seek prior approval for mergers – it only allows authorities to stop markets from becoming more dominated. It gives them no power to make markets less dominated.

Overseas, divestment orders are rare but effective

In the United States, courts are able to break up dominant firms that abuse their market power.

Such orders are rare, for the same reason Australian divestment orders relating to mergers are rare. Once the power is in place and has been used, firms at risk of such orders become very careful.

One of the first US divestment orders related to Standard Oil was in 1911. After finding that it used aggressive pricing to eliminate competition, US courts ordered it to be broken up into what became 34 companies. Competition improved as a result.

In 1974, US authorities filed a breakup suit against the telecommunications giant AT&T, arguing it had a monopoly on telephone lines. The eventual settlement led to AT&T giving up control of its regional operating companies, so-called “Baby Bells”. This allowed the new firms to compete with each other and lowered the prices of connections and calls.

In 2001, US authorities won a court order to break up Microsoft. It would have created one firm that built operating systems and another that built applications for operating systems. The order, however, was overturned on appeal.

Two decades later, in 2020, a court ordered the Facebook owner Meta to sell Instagram and WhatsApp, which was also overturned on appeal.

Divestment has been considered against Google over the behaviour of its business in the advertising market. It would also be an option in the Department of Justice’s current case against Apple for alleged abuse of market power.

Divestment isn’t the best solution in every case. Fines are often a more practical way to address misuses of market power.

But divestment is a useful tool in an authority’s armoury. The fact US authorities have only used it every few decades says more about the effectiveness of divestment than any lack of effectiveness. Once firms know the power exists, they behave better.

From Kennett to Howard, we’ve broken up public monopolies

Australia is no stranger to divestment. When the Kennett government privatised Victoria’s State Electricity Commission in the 1990s, it broke it up into several sometimes-competing generation, transmission and distribution businesses.

And when Australia’s Howard government privatised airports in the 1990s, it sold them separately in order to avoid market dominance, effectively breaking up the Federal Airports Corporation.

I don’t think Australian authorities should be able to break up corporations just because they don’t like the shape of a market, and I don’t think that breakups of Australia’s big two supermarket chains are likely to be a good idea. They rely on the efficiencies that come from scale.

But I think that where market power is being abused, breakups should be available as one of a number of possible sanctions. It’d keep big businesses on their toes.

Allan Fels is a professorial fellow at The University of Melbourne.

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